In the world of financial markets, the Federal Open Market Committee (FOMC) meetings are pivotal events that garner intense scrutiny. Market participants, from economists to traders, closely monitor these meetings for any signals regarding changes in the Federal target rate.
A critical tool in predicting these changes is the CME FedWatch Tool, a real-time indicator of market expectations based on 30-Day Fed Funds futures prices.
Let us delve into the likelihood of Federal target rate changes at upcoming FOMC meetings according to interest rate traders. Utilizing the CME FedWatch Tool, we will analyze the current market sentiment, focusing particularly on the upcoming meetings.
What is the CME FedWatch Tool?
The CME FedWatch Tool is an innovative resource developed by the CME Group to measure market expectations for changes in the Federal target rate. Interest rate traders and economists rely on this tool to gauge the probability of rate hikes or cuts, which are derived from the pricing of Fed Funds futures.
How Does it Work?
- Futures Pricing Analysis: The tool uses the prices of 30-Day Fed Funds futures to calculate the probability of various rate movements.
- Probability Calculation: These futures prices reflect market sentiment and expectations, which are then translated into probabilities of rate changes at each FOMC meeting.
For detailed insights, the CME FedWatch Tool can be accessed here.
Markets See Over 90% Chance of Rate Cut by September
Immediate Considerations: July and September Meetings
The upcoming FOMC meetings in July and September are of particular interest given current market predictions.
Table 1: CME FedWatch Tool – Conditional Meeting Probabilities
| Meeting Date | 300-325 | 325-350 | 350-375 | 375-400 | 400-425 | 425-450 | 450-475 | 475-500 | 500-525 | 525-550 |
|---|---|---|---|---|---|---|---|---|---|---|
| 31-Jul-2024 | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 4.7% | 95.3% | 0.0% |
| 18-Sep-2024 | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 4.6% | 93.5% | 1.9% |
Source: CME FedWatch Tool
Analysis:
- July 2024 Meeting: The tool shows a 95.3% probability of maintaining the current rate at 525-550 basis points, indicating minimal expectations for adjustments during this meeting.
- September 2024 Meeting: There is a 93.5% probability of a rate cut to 500-525 basis points, up from 70% a month ago. This significant shift highlights increased market confidence in a rate cut during this period.
Factors Influencing the Likelihood of Rate Changes
1. Economic Indicators
June Inflation and Labor Market Data:
- Inflation: The recent better-than-expected June inflation reading indicates a cooling trend, contributing to the expectations of a rate cut.
- Labor Market: Signs of a cooling labor market also support the argument for a rate reduction, as the Fed aims to balance employment rates and control inflation.
2. Fed Communications
Fed Chair Jerome Powell's Statements:
- On Monday, Powell stated that the recent data has “somewhat” increased the Fed's confidence in its trajectory towards the 2% inflation target.
- However, Powell emphasized a cautious approach, stating, “I’m not going to be sending signals on any particular meeting. We are going to make these decisions meeting by meeting and the evolving data and the balance of risks.”
Further Projections for Late 2024 and Early 2025
Table 2: CME FedWatch Tool – Conditional Meeting Probabilities for 2024-2025
| Meeting Date | 300-325 | 325-350 | 350-375 | 375-400 | 400-425 | 425-450 | 450-475 | 475-500 | 500-525 | 525-550 |
|---|---|---|---|---|---|---|---|---|---|---|
| 07-Nov-2024 | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 2.7% | 58.2% | 38.3% | 0.8% |
| 18-Dec-2024 | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 2.5% | 54.0% | 39.8% | 3.6% | 0.1% |
| 29-Jan-2025 | 0.0% | 0.0% | 0.0% | 0.0% | 1.9% | 41.3% | 43.3% | 12.5% | 0.9% | 0.0% |
Source: CME FedWatch Tool
Key Points:
- November 2024: Markets show a significant probability of maintaining rates at 475-500 basis points (58.2%) or slightly cutting to 450-475 basis points (38.3%).
- December 2024 to January 2025: There is a broader distribution of probabilities, indicating uncertainty but a lean towards maintaining or slightly reducing the rates.
What to Expect Going Forward
Market Sentiments and Future Projections
Given the persistent cooling of inflation and labor market adjustments, the likelihood of a rate cut appears strong for the latter part of 2024. However, Fed officials, including Chair Powell, emphasize a data-driven approach, suggesting that each decision will be made with evolving economic data and risk assessments.
Investor Implications
Strategies for Interest Rate Traders:
- Short-term Focus: Traders should closely monitor upcoming economic reports and Fed communications to adjust their positions accordingly.
- Long-term View: With cautious optimism, investors might position themselves for probable rate cuts while remaining vigilant for any shifts in economic indicators that could sway the Fed's decisions.
Conclusion
The CME FedWatch Tool serves as an indispensable resource for predicting potential changes in the Federal target rate by analyzing market expectations reflected in futures pricing. As of current indicators, there is robust confidence in a rate cut in September 2024, supported by cooling inflation and labor market data. Nevertheless, the Fed’s cautious and data-driven approach underscores the importance of continuous monitoring of economic developments and Fed communications for making informed trading decisions.
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